Concerns Mount over $1.3bn Power Sector Loans

Inadequate gas supply due to pipeline vandalism, the looming threat of reversal of electricity tariff hikes, inability of power companies to sign gas supply contracts, and large amounts of debt owed to power companies by ministries, departments and agencies (MDAs) of the three tiers of government have raised concerns around bank loans to the power sector.

The report estimated that a default in power sector loans could raise banks’ cost of risk (COR) in 2016 from 2.4 per cent to 3.9 per cent in aggregate terms.

“We arrive at this by modelling the effect of a 30 per cent default rate on power sector loans. A rise in the COR of this order would lower our 2016 forecast aggregate net profits for the five largest banks by about 18 per cent and a more significant of about 95 per cent for the smaller banks,” it added.

However, it stressed that this would not lead to a crisis, just that it might come at a time when banks are already reeling under the weight of non-performing loans (NPLs) from the oil and gas sector.

Several banks gave loans to the power sector, including significant sums lent to purchase power generation and distribution assets during the privatisation programme.

Though most of these assets are currently performing according to the banks, gas shortages and a reversal of previous tariff hikes are likely to hurt power companies’ cash flow and could threaten the viability of these loans.